Category Archives: Crisis Theory

We constantly hear the cry ‘lack of demand’. The economic crisis is ‘caused’ by a demand shortage & the ‘solution’ is more demand has to be ‘created’. Furthermore, we are in a ‘liquidity trap’ so no matter how much interest rates are lowered, businesses still do not expect to get a profitable return on their investments. Their ‘animal spirits’ are so low that government intervention is required to stimulate the economy & restore their optimism. Then capitalism can carry on in its merry way & with the right kind of government intervention the economy can be stabilised & crises consigned to history.

Keynesianism, like the rest of modern economics, is based upon marginalism. This is a subjective theory of value that says that the price of anything is due to its relative scarcity. The ‘price’ of money is the rate of interest (r). If the expected return from capital investment is lower than the cost of money capital (r) then there is no rational reason to invest. Keynes called the expected return from capital the marginal efficiency of capital (MEC); it is effectively the same as the rate of profit. So for there to be profitable investment & economic growth, the MEC must be higher than r. The leaders of business, entrepreneurs, are a fickle bunch according to Keynes, & are prone to bouts of pessimism about the future. Consequently the MEC periodically falls, investment slows & a crisis ensues. Marginalism, being a subjective theory, resorts to psychology to explain crises. Is this the best it can do?

The key to understanding the recurrent crises of capitalism is the term ‘overproduction’.

Capitalism produces not to meet human needs first & foremost, but to make a profit. It produces commodities to sell for more money than initially spent purchasing the required inputs. Money, at its core, is nothing more than that special commodity that acts as the universal equivalent. In otherwords, one particular commodity becomes the measure of value of all other commodities. Gold & silver have traditionally played the role of commodity money. There isn’t just commodity money though; there’s also token money & credit money. Today’s notes & coins are token money, as are Bitcoins, & credit cards are the most obvious form of credit money. But to have a firm grasp on the nature of commodity production, let’s leave token & credit money to one side for the moment.

There are many people who regard themselves as left-wing who do not want to get rid of capitalism. Not only the right-wing of the Labour party, but also some who consider themselves to socialists. They believe capitalism can be made more equal through government action & that the post-war period demonstrates this. In my opinion, they fail to appreciate the material conditions.

The post-war prosperity & the increasingly equality, exemplified in more equal access to health care & education, was possible due to a genuinely high rate of profit consequent upon the huge capital devaluation of the depression of the 1930’s, the capital destruction of WWII & huge increases in productivity thanks to the application of oil & gas. To really grasp this point requires an understanding of how capitalism works & why it is prone to crisis. This isn’t an easy subject, but it’s worth the effort.